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China patent law and anti-competition regulation update

This article summarises the draft Chinese Patent Law Amendments 2015 (Draft CPL Amendments) released for comment in April 2015, as well as the newly-promulgated Regulations on Prohibition of Abusing Intellectual Property Rights to Eliminate or Restrict Competition (7 April 2015).

Draft CPL Amendments:

The Chinese State Intellectual Property Office (SIPO) recently issued for comment the Draft CPL Amendments which included some general clarifications, updates, regulatory changes, as well as some surprising new sections.

Improved Design Patents:

An amendment to Article 2 paves the way for the allowance of partial designs in China, while Article 42 provides that design rights will now last 15 (instead of 10) years, likely encouraging international applicants. This, in combination with the previous changes allowing graphical user interfaces (GUIs) to be filed as design patents, will likely lead to an increased interest in Chinese design rights both domestically and abroad. These amendments presumably pave the way for acceptance of the Hague Agreement on industrial designs, later.

New Responsibilities:

The amendments to Article 3 explicitly expand the SIPO’s Patent Administration Department's (PAD's) responsibilities to include market monitoring, anti-counterfeiting investigations, the inspection/approval of local patent agencies, etc. However, this raises questions. How such powers will be implemented and under what circumstances? How will appeals be handled? What will the overlap with the judicial system be, especially the newly-established IP specialty courts, etc. Will patent owners take advantage of PAD’s system as it may be faster and more efficient? Or will patent owners prefer the procedural safeguards and known qualities of the court system? To this end the American Bar Association (ABA) comments question about the need for such changes when the courts have 30 years’ experience in such cases and as the courts are improving over time.

Article 60 of the Draft CPL Amendments allows the PAD to confiscate or destroy infringing products, and the tools, moulds, devices, etc. to make them. In effect, this provides the PAD with powers similar to those wielded by the Administration of Industry and Commerce (AIC) in trade mark matters. Article 60 also allows the PAD to mediate between the parties and to enforce court-approved mediation results. The PAD is also tasked, at its own initiative, with investigating wilful patent infringement "that disrupt[s] market order, such as suspected group infringements and repeated infringements". The article also gives the PAD the power to impose a fine.

Concern by Standard-Setting Organisations:

The proposed amendment to Article 60 will certainly be of significant concern to industry organisations, patent pools, and standard-setting organisations (SSOs) in China. See also Article 82, which will particularly affect businesses involved in SSOs and may have a chilling effect on SSO participation. Furthermore, Articles 60 and 53 provide for increased damages, such as "where the illegal turnover reaches or exceeds RMB 50,000, a fine equal to one to five folds of the illegal turnover may be imposed; where no illegal turnover has been generated or the illegal turnover is less than RMB 50,000, a fine less than RMB 250,000 may be imposed". Additionally, Article 64 is amended to provide the PAD the power to further punish those who are obfuscatory or unhelpful. How this translates into actual practice will be closely watched by all patent owners

Furthermore, in Article 61, the courts are specifically empowered to require an infringing party to turn over the (accounting) books. Interestingly, if the infringer refuses or provides fake books, then the court is specifically authorised to determine compensation with the evidence already provided, which we assume would likely favour the patent owner. In a move likely to be particularly welcomed by international applicants, wilful infringement may now be subject to double or treble damages (Article 65).

Amended Article 16 of the Draft CPL Amendments explicitly allows for individuals and employers to modify the default inventor remuneration requirements via contract, and will be greatly appreciated by businesses. However, there remains some ambiguity in the situation where the patent is licensed or assigned from the inventor’s employing entity to a third party licensee or assignee. For example, when the employing entity is a commissioned researcher or developer, there is a question as to whether this entity has a duty to keep track of the granted patent upon exploitation, etc.

Exception to the Exceptions:

Article 25 explicitly provides for various non-patentable subject matter, such as scientific discoveries, methods for intellectual activities, etc. In the health and pharmaceutical sector, Article 25(3) infamously prohibits patent rights for methods of diagnosis and treatment of diseases. However, now, an exception to the exception is provided so that "methods intended for animal farming" are now specifically allowed.

Internet Service Providers:

New Article 71 is interesting in that it singles out internet service providers (ISPs) who "know or should know" that a user is using the ISP for patent infringement to be jointly liable for such infringement, unless they have taken measures to stop infringement.

Licensing provisions:

Completely new sections in the Draft CPL Amendments (Articles 76-83) encourage licensing and commercial use of IP in the market place and put some limitations on the rights of licensees. The PAD is to promote this and is to publicise offers to allow third parties to commercialise a technology (Article 79). In effect, the PAD will now need to maintain lists of patents which the owners are willing to license, and to keep such lists up-to-date. Additionally, Article 83 specifically addresses matters relating to the use and registration of patents as loans and pledges.

Additional concerns are raised by some vague wording such as in Article 14, which states that "Exercise of the patent right shall comply with the good faith principle, and shall not damage public interests, unjustifiably exclude or restrict competition, or hinder technological advancement." The ABA comments question whether this section is sufficient to satisfy China's obligation under TRIPS Article 30. However, there is doubt as to whether or not an actual complaint would be effective.

Antitrust Overlap and Implications:

In the author’s opinion, the vague implications in the Draft CPL Amendments become of greater concern when viewed in light of the new Regulations of the State Administration for Industry and Commerce (SAIC) on Prohibition of Abusing Intellectual Property Rights to Eliminate or Restrict Competition ("Regulations"). Nonetheless, the Regulations are modelled on the EU TTBER (Treaty on the Functioning of the European Union to categories of technology transfer agreements) and may be taken in that context.

The Regulations were promulgated as Decree No. 74 on 7 April 2015 (see: www.saic.gov.cn) under the auspices of China's Anti-Monopoly Law (AML) and go into effect on 1 August 2015. The Regulations provide that the AML's IP protection provisions are not available when the "operator abuses its intellectual property rights to eliminate or restrict competition" (Article 2). Article 3 explains that "eliminate or restrict competition" means to implement monopoly agreements, abuse dominant market position and other monopolistic practices (except price monopoly)". Thus, given the vagueness of this and the many potential ways this can be interpreted, business and IP managers in China will need to be extremely careful. Luckily, some safe harbours exist (Article 5) where:

The total market share of the competing operators in the relevant market affected by their acts does not exceed 20 per cent, or there are at least four other independently-controlled alternative technologies in the relevant market which can be obtained with reasonable costs;

The market share of the operator or its trading partner in the relevant market shall not exceed 30 per cent, or there are at least two other independently-controlled alternative technologies in the relevant market which can be obtained with reasonable costs.

Nonetheless, observers could view these conditions still allowing the government and third parties plenty of “wiggle-room” to interpret them as they see fit.

Furthermore, the Regulations’ Article 7 indicates that a mandatory licensing scheme is contemplated, as it prohibits dominant market operators from refusing to license their IP "if such intellectual property constitutes an essential facility for business operation". Factors relevant to such a determination include whether or not a "reasonable" substitution is available for other operators to compete, whether refusing to license would adversely affect competition or innovation and impair customer rights and public interests, and whether or not licensing would cause unreasonable damage to the operator/IP owner (Article 7). Needless to say, without more clarity, such factors could easily be argued either way by the government or third parties.

Similarly, the Regulations’ Article 8 raises significant issues, and could be interpreted to prohibit exclusive license agreements "without justifiable reasons" in a "forced transaction", all of which raises more questions than answers. While this is similar to the common law “rule of reason” or “reasonable person”, must businesses now trust the courts to determine what is justifiable? What is a forced transaction? Is signing an agreement to avoid litigation a forced transaction? What is the true value of IP if you are prohibited from entering into an exclusive contract to implement it or enforcing it to get an infringer to pay a license and/or stop?

Requiring grant-back provisions for improvements "without justifiable reasons" are also expressly prohibited in the Regulations’ Article 10, even though such clauses are standard in technology licensing agreements. Without such a clause, many agreements would not be signed at all. Or, companies may turn to other options which would be far worse – for example, requiring that the licensee make no improvements on the technology.

Differential licensing conditions are also specifically addressed (Regulations’ Article 11) and prohibited, again, "without justifiable reason", and the far-reaching implication of this may be to essentially cause all IP to be licensed in FRAND-like terms. Furthermore, in the following the Regulations’ Article 12, the activity of patent pools is directly addressed, with specific prohibitions against:

Restricting participants of a patent pool from licensing patents outside the patent pool as independent licensors;

Restricting participants of a patent pool or licensees from researching and developing independently or jointly with a third party technologies competing against the pooled patents;

Compelling licensees to exclusively grant their improved or developed technologies back to the managing organisation of the patent pool or its participants;

Forbidding licensees to question the validity of the pooled patents;

Treating participants of a patent pool with the same conditions or licensees in the same relevant market differently in trade terms; or

Other acts identified by SAIC as abuses of dominant market position, unless such actions are "justified".

Finally, administrative penalties and fines of up to 500K RMB may be imposed upon those found guilty of violating the Regulations (Article 17).

Accordingly, it can be seen that the Chinese Government is becoming increasingly serious about IP rights, but what will really be of concern to business and IP managers is how these new laws and regulations will actually be implemented, how consistently they will be enforced, etc. As these new laws and regulations come into effect, their intertwining with the AML lead to serious questions and implications that have yet to be addressed. The focus on patent pools and the limitations thereof obviously provide significant advantages to current Chinese businesses and manufacturers in the high tech and electronics industries, and it will be interesting to see how this area evolves over the next decade.

The author is grateful to the QBPC for providing timely translations of the Draft CPL Amendments and Regulations, and to Paul Jones, David Upite, and James Cleeve for providing input and comments.